The 10-year U.S. Treasury Yield has firmly breached the headline-grabbing 3% threshold to 3.1% - the highest level since 2011. It is important to remember that rising rates – although painful over the short-term as bond prices move inversely to yields – are beneficial to fixed income investors over the long-term.
The Current U.S. economic expansion is now the second largest in post-war history (107 months)
This month, the current U.S. economic expansion reaches the 107-month mark, making it the second longest economic expansion on record. The next milestone is 13 months from now – June 2019 – at 120 months and it is looking increasingly likely that this expansion will continue for more than a year and set the new record.
2017-18 Trend In Global EPS Much Stronger Then In Prior Years
Earnings revisions have been on a strong upward trend since mid-2017. With first quarter earnings season wrapping up, companies have exceeded approximately 80% of analyst earnings estimates; therefore, providing an even higher growth rate than what was anticipated for earnings.
Global growth has stepped up in a synchronized fashion. Nearly all countries tracked by the Organization for Economic Co-operation and Developed (OECD) are recording positive growth rates – the first time since the global financial crisis.
Volitatiy Reemerges In The Market
Equity market volatility as measured by the volatility index (VIX) remained tepid throughout 2017. The market’s reaction to inflationary fears, increasing interest rates and a potential trade war has led to volatility roaring back in 2018.
Comparing Size of Tariffs With Incremental Fiscal Policy
The markets are conflicted between the benefits of tax reform and the turbulence of tariffs. The size of fiscal stimulus, driven by tax reform, dwarf the size of tariffs announced thus far. Nevertheless, tariffs and the potential for trade war have been a destabilizing factor for the markets and will likely continue to be until we gain further clarity.
Headline GLI vs. Global Industrial Production
Goldman Sach’s proprietary indicator, called the Global Leading Indicator (GLI), meant to provide an early signal of the global industrial cycle is showing signs of weaker growth in global industrial production.
Advance Goods Monthly Trade Balance
The announced steel and aluminum tariffs have now gone into effect. Going forward, a 25% tariff will be placed on steel imports and a 10% tariff placed on steel imports. These tariffs are due in large part to the material trade deficit that the U.S. has – particularly with China. The monthly trade deficit for January widened to a 9 ½ year low likely adding more fuel to President Trump’s agenda of fair trade.
Profit Margins Have Been A Key Driver Or Earnings Growth
Expansion of profit margins have been a key driver of earnings growth in the U.S. since the global financial crisis. Should the Federal Reserve continue to raise rates and wage growth continue to grow, profit margins will likely come under pressure. Stronger revenue growth will need to offset this dynamic in order for earnings to continue to grow strongly.
Corporate Earnings Revision Ratios, 2008-2018
We have witnessed a sharp acceleration in U.S. earnings upgrades as analysts have factored in the impact from the tax cuts and fiscal stimulus. The ratio of analyst upgrades to downgrades for U.S. large caps has spiked to the highest level since the data series started in 1988.
S&P 500 Index
Pullback in perspective. The recent market correction has put the markets back on the trajectory of the last two years.
C.S. VelocityShares Inverse VIX Short-Term ETN
The dangers of “following the crowd” and chasing the latest trends are illustrated in the following chart. Strategies that provide inverse (e.g. “short”) equity volatility exposure gained significant attraction over the past two years as volatility remained abnormally subdued. As equity volatility spiked to a 2 1⁄2 year high recently, the popular Credit Suisse VelocityShares Inverse VIX Short-Term exchange traded note (ETN) – which had over $1 billion of assets - lost nearly all of its “value” and is now being liquidated by Credit Suisse.
Investors piled into equities during the month of January as the set the record for the biggest month of flows into equity funds on record, according to Bank of America Merrill Lynch. Interestingly, there was one group of investors that wasn’t so anxious to buy at these levels: company insiders who must report their purchases of stock in the companies they work for.
US Treasuries vs Bond Volatility
U.S. Treasury yields have been under pressure in 2018 while implied volatility is at record lows. This looks quite similar to that seen just prior to the “taper tantrum” in 2013 and could portend the beginning of the fourth bond market tantrum since 2014.
Up or Down 1% Days (2017 is YTD)
2017 was one of the calmest years on record with very steady returns. There were only eight days when the market moved by more than 1% during the calendar year. As the year moved, the calmness grew. None of the eight 1% moves occurred in the fourth quarter. While we believe 2018 will provide another strong set of returns for equity investors, they should be prepared for more heightened levels of volatility to accompany returns.
Percent Change, Annual Rate
Global growth accelerated sharply in 2017 and the upswing became increasingly broad based throughout the year.
G3 Policy Rates
The Fed continued at a slow and steady pace with three rate hikes in 2017 while the ECB and BOJ stood pat.
Economic data are beating expectations by the most in nearly six years according to Citigroup’s economic surprise index. It’s massive run higher is one sign that the economy has gained momentum this year.
Framework for Interaction Between Financial and Business Cycles
Broadly speaking, the economy remains in the goldilocks phase of the financial & business cycles.
Bitcoin’s Meteoric Rise
Bitcoin’s meteoric rise in 2017 has been unprecedented; making other market moves that led to eventual bubbles look rather insignificant.
US GDP - Quarterly Growth
The U.S. economy expanded at a 3.3% rate in the third quarter of 2017; marking the second consecutive quarter of 3% GDP growth and the strongest quarter in 3 years.
G20 Economic, Monetary Policy and Credit Cycles for 2018-2019
Charting where the world’s largest economies fall in regards to economic, credit, and monetary policy cycles. A majority of countries continue to expand. However, higher volatility can be expected as we continue to progress into the later stages of the credit cycle and monetary policies become less accommodative.
What Can A Decade Do?
How quickly things can change in just 10 years. Once dominated by the major corporate conglomerates, the five largest companies in the world measured by Market Capitalization are all tech companies. An illustration of how disruptive technology has become.
Caterpillar Dealer Retail Sales By Region
Synchronized global growth has been the dominating theme in 2017. Caterpillar’s dealer sales by region illustrate this theme as well – with global retail sales rising 13% year-over-year as reported in their third quarter earnings release
Economic cycles don’t die of old age. While the current economic cycle has been unusually long, when comparing the cycle with previous ones in terms of quantity – and not time – reveals an economy with plenty of time (and capacity) left for continued economic growth.
US Manufacturing Trends
Hurricane Harvey & Irma trimmed US economic activity in September, primarily affecting manufacturing output. However, the nation’s economy showed encouraging resilience in a month of disruption as the flash estimate for the broader Manufacturing Index came in at 54.6; comfortably above the 50 point threshold that indicates expansion.
The Eurozone recovery Is being driven by domestic demand
Strong Consumer Confidence, improving labor markets, and low interest rates are all contributing to the domestic demand forces driving the Eurozone’s recovery.
Assets Held By The Federal Reserve
The end of an era for unprecedented monetary policy. The Federal Reserve announced on 9/20/2017 that it will start to unwind the easy money policy that it has pursued since the Global Financial Crisis and will begin to allow $10BN of bonds mature every month starting in October.
U.S. Output Gap and Business Cycles
The output gap – which measures potential GDP, realized GDP, and estimated natural rate of employment – has narrowed; reflecting realized growth that is essentially in line with potential growth. Reaching a low of -6% in 2009, the level of “slack” in the economy has almost been worked-off.
Household's Growing Net Worth
Improving home values and rising equity markets propelled the total net worth of U.S. households further into record territory during the second quarter of 2017.